Fundamentals, market depth and total exposure paint a picture of a market stretched on conviction

Enthusiasm for the 'long risk' trade seems to be easing up even though many of the benchmarks for that speculative view continue to press higher. Fresh from the weekend and following Friday's robust US July employment data, volume on some of the most popular long 'market' trades hit exceptional lows to start the week. The SPDR S&P 500 ETF (SPY) and Powershares QQQ NasdaqETF (QQQ) saw volume Monday hit their lowest non-holiday levels in more than eight years. That is in contrast to both instruments hitting record highs. While heavy volume isn't necessary to carrying markets, restrained participation is another characteristic in a growing list of factors that speak to complacency and skepticism.

As discussed over the weekend, momentum behind risk-oriented markets has faltered under the weight of already-exceptional exposure to 'risk' and a tangible dimming of the fundamental outlook. In turn, complacency has translated into remarkable activity milestones - the VIX volatility index dropping below 12 while the S&P 500 hits record highs which has aligned to at least temporary reversals in his bull phase. Or the same volatility index sliding for six consecutive weeks, a feat only seen four other times over the past three decades. Volatility and volume (participation) maintain a general, positive correlation. That presents a conundrum if the market remains sidelined by tepid opportunity and does not move in mass unless motivated by panic and deleveraging.

It should be stated that this week's opening move is disappointing when we consider the tail winds of the past few weeks: a fresh wave of stimulus between the bank of Japan and Bank of England as well as the encouraging labor update from the world's largest economy. A quickly depleted optimism with such a hearty fundamental mixture - which in past years may have stoked a trend for weeks if not months - furthers unease. That said, there are few definitive pieces of event risk scheduled for release through the week to offer a lightning rod for sentiment to collapse. That leaves us at the whims of an increasingly temperamental and suspicious consensus market view through the near-term.